In the Henry–Susan transaction, Henry will be charged prepaid interest for the balance of the closing month. Based on the numbers, how much prepaid interest is due at closing?

• A. 300.00
• B. 325.48
• C. 350.25
• D. 375.12

Answer: (B)

Prepaid interest at closing is the interest that accrues from the day of closing through the end of that month. It’s calculated using a per-diem method: take the loan amount and the annual interest rate, apply the rate to the loan balance, then divide by the number of days in a year (commonly 360 for per-diem calculations in these questions) to get a daily interest amount. Next, multiply that daily interest by the number of days remaining in the closing month (including the closing day). The result is the prepaid interest due at closing.

Using the numbers in this Henry–Susan scenario, that per-diem amount times the days left in the month comes out to 325.48, so that is the prepaid interest due at closing.